3 Defense Stocks to Consider as Geopolitical Tensions Rise

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This past week, Russia invaded Ukraine. The crisis marks the highest level of geopolitical tensions in Europe in decades.

So far, Russia’s advance has been stalled due to unexpected strong Ukrainian resistance. At the same time, while the US and its allies haven’t intervened on the ground, they have been supplying arms and financial backing. They have also imposed sanctions and have now cut off a number of Russian banks’ access to the SWIFT international payment system, thereby severely restricting Russia’s trade capabilities.

Financial markets are reacting, of course, in a variety of ways. The price of oil is up and at a level not seen since 2014. The Russian stock market has simply collapsed, as has the ruble against the dollar. On Wall Street, stocks fell sharply as the Ukraine crisis grew in recent weeks, and since the Russian invasion have swung wildly down and then up.

Volatile times like these usually bring opportunities for investors, if you know where to look. One obvious place to start: stocks in defense companies.

Using the TipRanks platform, we’ve looked up several defense stocks that fit a profile: each gets a Buy rating from Wall Street’s analysts, and each has a double-digit upside for the year ahead. Here are the details.

CACI International (CACI)

First up is CACI International, an information tech company offering a wide range of services to multiple Federal Government departments, including Defense and Homeland Security. The company’s services include digital solutions for engineering services and enterprise IT, with applications in command and control systems, AI and deep learning, secure cloud, robotics and automation, and network modeling and simulation.

While CACI devotes a large portion of its business to the defense industry, it has significant civilian contracts, as well. In one recent boost for the company’s civil aerospace technology business, CACI announced this month that it had delivered a high-bandwidth free-space optical modem for use in low Earth orbit – a key component of the International Space Station communications system.

These are expensive services, provided on long-term government contracts; the result is a long run of highly consistent revenue numbers. CACI’s top line has held consistently between $1.4 billion and $1.56 billion for the past two years.

In its most recent reported quarter, Q2 of fiscal year 2022, released at the end of January, CACI showed $1.5 billion at the top line, and an adjusted EPS of $4.39 per share. The EPS came in slightly below the $4.50 estimate but was up 5% year-over-year.

CACI management has stated that it remains committed to delivering value to shareholders, and JPM analyst Seth Seifman sees that as a key point for investors going forward, writing, “Cash flow this year is benefiting from a $230m one-time tax benefit, but we expect CACI to continue to generate >$500m of cash flow and growing looking forward. Buybacks at the current price look attractive, but mgmt. noted that they are unlikely to raise debt to buy back stock at the current leverage levels. However, the ~$500m of cash we expect to be generated in 2H22 could be used.”

In line with his comments, Seifman rates the stock as Overweight (a Buy) with a $320 price target to indicate room for 20% upside in the next 12 months. (To watch Seifman’s track record, click here.)

Overall, it’s clear that Wall Street agrees with this bullish stance. The stock has 6 recent reviews, which include 5 Buys and 1 Hold to support a Strong Buy consensus rating. The shares are priced at $266.08, and their $306.67 average price target implies a 15% upside potential. (See CACI’s stock analysis at TipRanks.)

Teledyne Technologies (TDY)

Next up, Teledyne, is an engineering and tech firm that produces high-end electronics and hardware for use in a variety of civilian and defense-related applications. The company operates in four divisions – instrumentation, digital imaging, aerospace & defense electronics, and engineered systems – and its product line includes such devices as digital imaging sensors and cameras with visible, infrared, and X-ray capabilities; marine monitoring and control instrumentation; electronic test and measurement equipment; aircraft information management systems; and defense satellite communications systems. Teledyne operates in the US and Canada, along with the UK and Western Europe.

Teledyne has grown to its current incarnation – it is a $20 billion company – through a policy of smart acquisitions. Its most recent such move, completed in May of 2021, was the acquisition of FLIR Systems, a video surveillance leader, for $8 billion. The newly acquired company will operate as a subsidiary under the name Teledyne FLIR.

In a more recent announcement, Teledyne this month made public a $16 million Indefinite Delivery/Indefinite Quantity (IDIQ) contract with the US Geological Survey. The contract will run for 5 years, and includes products and services from across Teledyne’s Marine portfolio.

At the end of January, Teledyne delivered its Q421 report, showing strong results. Quarterly revenues came in at $1.375 billion, a company record, and the non-GAAP EPS of $4.56 was up 31% yoy and beat the pre-release forecast by 8%. The company reported annual revenues of $4.61 billion for 2021, up 49% from 2020.

5-star analyst James Ricchiuti, covering this stock for Needham, considers Teledyne as “perhaps the most consistent company in our universe of advanced industrial technology stocks, with a proven track-record in M&A and the ability to navigate through challenging environments in its various market verticals.”

Ricchiuti sees the FLIR deal as key to the company’s prospects, writing, “TDY’s acquisition last year of FLIR Systems represents the largest M&A deal the company has undertaken, and we believe has been a game-changer in terms of enhancing TDY’s infrared detector and sensor technologies footprint while giving it access to new defense growth opportunities for unmanned ground-based vehicles and drones and potentially longer-term in ADAS applications for the automotive market.”

Ricchiuti’s Buy rating comes with a $520 price target that suggests a potential upside of 21% by the end of 2022. (To watch Ricchiuti’s track record, click here.)

There are 7 recent reviews of Teledyne on record, with 6 Buys over 1 Sell for a Moderate Buy consensus rating. The stock has an average price target of $536, for a 25% upside potential from the current trading price of $428.63. (See Teledyne’s stock analysis at TipRanks.)

Kratos Defense (KTOS)

The third stock on our list, Kratos, is more of a pure-play defense stock than CACI or Teledyne. Kratos focuses mainly on customers in the US National Security sector, including the US Navy and Air Force, the Missile Defense Agency, the US Intelligence Community, NASA, and Foreign Military Sales. The company designs and develops a wide range of platforms and products for this customer base, from unmanned aircraft to satellite communication systems, to cybersecurity and cyberwarfare systems to hypersonic technology. The company works to change the way that technological breakthroughs are brought to the markets.

Kratos released its latest quarterly results last week, beating both the top-and bottom-line estimates. Revenue hit $211 million. This was up just 2.5% year-over-year but came in $3.2 million above Wall Street’s forecast and amounted to the best quarterly top line in over two years. The full-year 2021 top line of $811 million was up more than 8% from 2020. The company’s Space, Satellite, and Cyber division lead the full-year gains, increasing almost 19% to reach $276.3 million.

In earnings, Kratos reported that adjusted quarterly EPS grew yoy from 8 cents to 11 cents (a gain of 37%), and beat the 9-cent estimate by a 22% margin.

RBC’s 5-star analyst Ken Herbert points out the drawback for a company in relying on Federal contracts – to wit, waiting for Congress to pass a budget, but believes that shouldn’t deter investors. He writes, “The juxtaposition of the near-term budget uncertainty and the longer-term upside for KTOS remains frustrating for investors. We continue to view much of the risk for KTOS as timing related, which is why we are remaining bullish on the stock. We do expect fundamentals to continue to improve with the passage of the FY22 budget and to see a corresponding uptick in 2H22.”

Herbert’s bullish outlook translates to an Outperform (Buy) rating, while his $24 price target implies a one-year upside of 28%. (To watch Herbert’s track record, click here.)

The Moderate Buy consensus rating here reflects an even split from the Street’s analysts – the 8 reviews divide 4 to 4 on Buys and Holds. KTOS is selling for $18.68, and the $22.50 average price target suggests 20% upside this year. (See Kratos’ stock forecast at TipRanks.)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.



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